The arrival of real estate investment trusts, or reits, in Germany promises to revive the countryâs ailing commercial property sector, but political intervention could threaten their success and hold back investment in the German property market.

The German government is preparing legislation for reits, a tax-advantaged fund that invests in property and distributes most of its proceeds to shareholders. Reits will be allowed to invest only in German commercial property, which has long been the sick man of European real estate after years of high vacancy rates and falling rents. Property companies, investment analysts and asset managers expect the vehicles to attract €40bn ($60bn) to €50bn.
Projections of GDP growth and widespread corporate restructuring in Germany are adding to the excitement as companies offload non-core assets, including property. More than 70% of German corporations own their premises, compared with an estimated 30% in the UK and US.
Bart Gysens, equity analyst for European real estate at Lehman Brothers, said: “There is billions worth of property owned by non-strategic owners who are keen on rationalising their balance sheets.”
Jörg Boysen, fund manager at Union Investment in Frankfurt, said office rents are expected to grow by 7.5% a year in Hamburg, 3.6% in Munich and 3.1% in Frankfurt, although office vacancies in Frankfurt are expected to reach 18%.
Ralf Grönemyer, head of German product at Commerzbank Corporates & Markets, said: “Reits will take off because the German real estate market is in transition; large real estate companies and private equity groups have changed the way investors look at assets. The government sees real estate as one of the main elements for private pension provision, either direct or indirect.”
Harold Garrison, chairman of HDG Mansur, a real estate fund and asset manager which recently acquired €190m worth of German office space, said: “When you look at the economy and the chances for growth in the next five years, and at the fact that there has not been a lot of construction, it seems there is a good chance the office market sector will recover.”
With a market capitalisation of €15bn, the German listed property market is far smaller than those of other European countries. Although some pension funds invest up to 10% in real estate, and other institutions, such as churches, have far greater exposure, property has struggled to perform.
Kai Klose, senior associate for real estate and equity research at Sal Oppenheim, a private bank based in Cologne, said: “Reits will make property a much larger asset class. They will boost the market capitalisation of German property and increase the size of the market.”
Others are less optimistic that reits will rescue the market from the doldrums.
Raffaele Lino, managing director in Germany for DTZ, a real estate advisory firm, said: “Reits will bring more liquidity to the property market by introducing a new investment vehicle and it is a hedge against inflation, but it will not solve all problems for all investors.”
A big concern is the government’s decision last month to exclude residential property from reit holdings. Commercial property is more volatile than residential property, and Lino believes the exclusion will harm the development of the trusts.
He said: “There is also a moral hazard. Owners of low-quality commercial property which might be difficult to sell will be tempted to turn it into reits if they perceive the appetite is high. This can increase the risk profile.”
The government bowed to the left wing of the Social Democratic Party, which was under pressure to calm tenant groups’ fears that financial owners of shares in residential property would drive up rents. Local rent controls would remain in place, regardless of who owns the property, said analysts.
Philippe Tannenbaum, head of research at Eurohypo Real Estate Investment Bank, said: “We all know it is stupid to exclude residential property. This is being done for political reasons.”
In spite of the concern, Garrison said: “I don’t think it will have a big effect since there is a lot of commercial property available.”
Other conditions expected under the draft legislation include reits having to list on stock markets and trade publicly. Privately held reits will not be allowed. Time restrictions will be placed on the disposal of assets to encourage long-term investment and limit property speculation. For tax-free status at fund level, reits will be required to distribute 90% of their profits to shareholders.
Groenemyer added: “Reits offer a better risk/return pattern and an excellent diversification opportunity within a portfolio. I would assume direct holdings in real estate to be converted into reits, which are more liquid compared to trade.
“The government expects reit investors would be primarily institutions and pension funds.”
Quality control, however, will determine reits’ success. Lino said: “If reits are formed based on good-quality properties and are well structured and well managed, this could work well.
“But if the properties are volatile, that could be a negative for the market in reits.”